![Knowing how to buy low, sell high [photo: nytimes.com]](http://www.getmoneyenergy.com/wp-content/uploads/2010/01/buylowsellhigh.jpg "Knowing how to buy low, sell high [photo: nytimes.com]")
The stock markets are ultimately unpredictable, but that doesn’t mean they are mysterious or without guiding trends and principles that anyone can learn.
As long as you’re not day trading and hoping to turn profits within minutes or by 5pm, there are a number of ways you can help ensure that you buy your shares low and sell them higher (if in fact you sell them at all – which is another topic for discussion).
All it takes is some patience (that’s key) and some willingness to do a bit of very simple research over time. If you can’t do this, then the conventional wisdom about market timing is probably something you should stick to.
Know How To Buy Low, Sell High
Don’t Buy a Stock, Buy A Business.
Do your research and buy a proven company with proven goods and services in a growing field. Better yet, buy the industry or sector leader (or the #2 name in that group). You wouldn’t buy a lemon, so check under the stock’s “hood” and see what’s going on with the company. Read the news. Just some simple forethought and research can weed out a good number of stocks. If you have never heard of the company, you definitely need to do your research, and you should think carefully before buying something you don’t understand. But if you know your company and you know its overall growth prospects, you’re already in a solid position for following some of that stock growth over time.
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Keep Track of Stock Movements over time.
It’s like going shopping. Make a list of the stocks you know you want to buy (this will be your “stock watchlist“). Don’t impulse shop. Get to know what a good deal looks like. Watch your stocks carefully and get to know how they react to the markets. Study their sectors. Study their 1-year, 5-year and 10-year charts. I’ve been doing this for a couple of years, now, and during the meltdown in 2008-2009, one of my stocks crashed to almost 50% of its prior value. But since I knew the company well and knew the markets would never let it stay at that price, I was able to confidently jump on it and snap it up for a bargain. To date it is up 100% from that level (but I don’t plan to sell it, anyway).
Don’t Buy When Stocks Are Hitting Their 52-week Highs.
Conversely, a good time to sell (if, in fact, you’ve decided clearly that you aren’t holding long-term) might be when stocks are breaking up against or passing through their 52-week highs. The 52-week high is a natural psychological and technical resistance point. Sure, the stock can significantly move past it. But a good idea is to take part of it off the table at this point – and not to be adding more to your position at this point.
Don’t Buy (or Sell!) When Stocks Are Hitting Their 52-Week Lows.
But wait, you say – shouldn’t this be the opposite of the above tip? Not exactly. Here’s why. I’ll assume you can see why it’s obvious that you shouldn’t sell at the 52-week low point. It almost guarantees you would lose money (unless you had bought the stock years earlier and the current 52-week low is still higher than your initial entry point). The 52-week low is just as much of a psychological and technical support point as the high is a resistance point. If a stock breaks the 52-week low, it looks bad and you can’t be sure how much further it will fall or how long the falling trend might last. It’s good to get the stock on sale, but first you want to see the stock price uptick a bit to ensure that a new buying rally may have begun.
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Buy Before You Hear the Good News.
And sell (if you’re a seller) before you hear the bad news. The best time to buy umbrellas is before it starts raining. This is part of the theory behind seasonal and cyclical investing. You might not want to buy your favorite oil stock in May – but back in January, its price might be more attractive, because the lead-up to the driving season and increased oil sales hasn’t kicked in yet. Similarly, if your company is coming out with an earnings announcement next month and you are expecting good news, buy your stock in advance.
Over time, the default direction of the markets is always up. Up is the direction of least resistance. It doesn’t mean it always happens, though – the past 10 years on the S&P 500 (a basket of the 500 largest American stocks) generated negative returns. It’s been said that you don’t have to get the exact entry and exit points right, you just have to get the direction right.
I’m not trying to say that buying low, selling high is practically easy – it’s not, because our emotions come into play, as does other information (and the occasional buyout that doesn’t lead to profits), and the fact that we are humans and not digital trading algorithms. But these basic points should at least help put you in the right direction.
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{ 9 comments… read them below or add one }
Do you ever read or follow IBD? One of their qualifications for picking up a good stock is one that has just come off the 52 week high. IBD talks a lot about the shapes and trends of stocks and they are looking for stocks poised to make a run up.
Not regularly, but I have read them. Yes, if it’s just coming off the high, that could represent a nice momentary correction that you could pick it up in, especially if it starts to uptick again – it could be approaching a new leg of growth.
Number 3 is very good advice – Don’t buy at the 52 week high. But your sub-point, ME, is even more important. Take at least some of your money off the table when stocks reach their 52-week high! I got burned by not doing this a while back and it cost me more than a few bucks – mainly because I didn’t have an exit strategy defined when I got the stock in the first place (can ya tell I’ve been learning this investment stuff through the school of hard knocks? LOL).
Needless to say, I learned a very valuable (and somewhat painful) lesson there.
Nice article!
Best,
Len
Len Penzo dot Com
I would had been in such helpful post reading months ago BEFORE purchasing 23 000 units of Dumont Nicketl (DNI) at 3 cents per stock…. lol I desperately try to sell at 4 cents. But 5 cents had been reached one, and I wonder if Dumont Nickel will ever reach 4-5 cents… My sell order still on, I continue to renew it every months.. Kind of a bad trade experience. But thank you for his post anyway.
@Sunny – yes, with penny stocks, it’s nice to hear another analyst’s view on them…. they could stay around three cents for a long time. I know because I have a couple. But penny stock status in and of itself does not mean a company is worthless – far from it.
@Len – thanks! I haven’t got around to using stop losses yet, but they’re another good technique to bring up in order to automatically take some profits if the stock starts dipping more than, say, 5%.
I’m in a savings and investments class in college and am a complete novice to this. I am trying to understand the buy low sell high in people long and short in the market… any advice?
@Shawna – not sure what you mean – aside from the tips here? Long means you think the stock will go up and you’re holding longer term. Short can either mean short-term, or more likely, actually shorting the stock because you think it is going to decline in price.
Which site would you recommend to track 52 week low and high for your stocklist? I just registered for yahoo finance but not sure if it tracks that.
We should also take P/E into consideration when selecting which stocks to buy?
TIP: By the way, I recently read the “Commision free investing” book which gave he following formula:
I = (H – L)/(H-L) * periodic investment amount. Where H = 52 wk high, L = 52 week low, I is amt to invest.
Shaila, tracking the 52-week highs and lows is very easy and can be done with most finance data programs. You can get it from any basic (free) news site like the Financial Post, Bloomberg, Google Finance, or straight from your online discount broker like TD Waterhouse. P/E is another useful general screener, which only tells you if a stock is trading “cheap” for its real value if you know what its real value should be. In general, a higher P/E (eg., 25x) is more “expensive” than a lower one, but only if the company doesn’t warrant that multiple.